BOJ to hold policy, debate emerging market risks

Leika Kihara

4 Min Read

TOKYO (Reuters) - The Bank of Japan may hold off on declaring the world’s third-largest economy has cemented its recovery at a policy review this week as it waits to see the fallout on activity from slowing growth and capital outflows in emerging nations.

A pedestrian walks past the Bank of Japan headquarters in Tokyo August 8, 2013. REUTERS/Yuya Shino

No change is expected in the massive monetary stimulus that the BOJ launched in April, which will see it nearly double the monetary base to 270 trillion yen ($2.75 trillion) by the end of 2014 to achieve its 2 percent inflation target.

Increasingly bright economic signs at home have been overshadowed by geopolitical risks in Syria and sharp outflows of capital from some emerging markets on expectations the U.S. Federal Reserve will soon start trimming its monetary stimulus.

The central bank is thus expected to maintain its view the economy is “starting to recover moderately,” instead of offering a more upbeat assessment declaring that the recovery has already taken hold, according to sources familiar with its thinking.

The two-day board meeting will start on Wednesday.

“The global economic recovery remains fragile, so there’s huge uncertainty on how a sharp outflow of funds could affect financial markets and global growth,” BOJ board member Yoshihisa Morimoto said last week on the risk of a bigger capital withdrawal from emerging economies.

The Indian rupee and Turkish lira have hit record lows against the dollar, the Indonesian rupiah has fallen to four-year lows, and other currencies have tumbled as investor sentiment has soured on emerging markets.

Exacerbating the move has been a rush to safe-haven currencies, such as the yen, as investors worry about the risk of United States launching air strikes on Syria.

CAPEX PICK-UP EYED

Japan emerged from recession in 2012 and data for much of this year has shown the benefits of Prime Minister Shinzo Abe’s reflationary policies and the BOJ’s aggressive stimulus.

Recent data have been particularly encouraging for the BOJ’s battle to end 15 years of grinding deflation.

The jobless rate is at the lowest in almost five years, consumer spending has been strong and core consumer prices rose at the fastest pace in nearly five years.

But many BOJ officials want to see clearer signs of increase in wages and capital expenditure before declaring that a sustained recovery has taken hold.

Corporate capital spending was steady in April-June from a year earlier after two straight quarters of declines, Ministry of Finance data (MOF) showed on Monday.

The data also showed companies’ recurring profits rose 24 percent in the second quarter from a year earlier, boding well for the outlook of capital spending.

“This is a pretty strong reading. Companies reaping big profits would surely be more willing to spend on plant and equipment,” said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute in Tokyo.

The MOF data will be used to calculate revised April-June gross domestic product (GDP) data, due on September 9, which the government has said would be among key factors in deciding whether to proceed with a planned sales tax hike from next year.

Many analysts expect second-quarter GDP growth to be revised up from a preliminary annualized rate of 2.6 percent, which may strengthen the case for Abe to go ahead with the tax hike.

“The economy is likely to remain firm in July-September, so the dominant market view is that the environment for raising the sales tax is in place,” he said.

Unless Abe changes the plan, the sales tax will be raised to 8 percent from 5 percent in April and to 10 percent in October 2015. Critics have called for a delay or watering down the tax increases for fear of undermining the economy’s recovery. Abe is expected to make a final decision by early October.